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Attorney Outlines Measures for Responding to Corporate Crises

A company facing a corporate crisis should first call its lawyers, according to Laurie Smilan, a partner with Latham & Watkins LLP, followed by calls to the SEC and the D&O insurer. No company is exempt from accounting problems and corporate wrongdoing, she warned, and the discovery of such problems can result in lengthy audits, restatements and investigations. Smilan outlined the various steps to take in response to a corporate crisis at an audit committee workshop hosted by the Practising Law Institute.

In her prepared outline, Smilan noted that each crisis is subject to its own set of facts and circumstances which will govern the specific response. She described the general steps that should be taken, beginning with the call to the lawyers. The lawyers --and probably several sets of them --she added, should be consulted prior to disclosing, publicly commenting on, or taking actions in response to the crisis. The lawyers will help the company decided when and what to disclose, how to conduct the internal investigation, how to protect or when to waive privileges, and how to document the problem in a way that protects the company or does no further harm. The lawyers can also help with any government and private litigation.

Smilan said that self-reporting is the first step in establishing a cooperative relationship with the SEC. The SEC may significantly reduce the sanctions against a company if it self-reports the violation, voluntarily provides details about its internal investigation and institutes its own remedial measures.

Smilan noted that many directors' and officers' insurers have policies with sublimits for crisis management. She suggested that companies consider independent director liability insurance. Companies should provide insurers with information about the likely costs/exposure so that the settlement will not get bogged down. Smilan also urged companies to consider a strategy if the insurer seeks to rescind the coverage.

Investigate, evaluate and fix the problem, Smilan said, in order to regain the company's good standing with investors and regulators. A committee of independent directors with their own expert counsel and forensic accountants should identify the misconduct or accounting errors and take strong disciplinary actions, including termination, against any culpable officers and employees. The committee should prepare a sufficiently detailed report for the government. The company should adopt corporate governance measures and other policies and procedures that are designed to prevent a recurrence. The corporate culture should emphasize honesty and integrity over short-term financial reporting, she said.

Smilan recommended that companies limit their documents, but document their diligence. She also urged companies not to document too early or too much since early conclusions may prove incorrect. Stick to the facts, she said. Time, care, deliberation and independence should be the hallmarks of the investigatory process, according to Smilan. The investigation should conclude with an investigatory report.

The auditors' agenda includes the sign-off on any restatements and related disclosures. Smilan cautioned companies to beware of conflicts of interest. Auditors are at risk for erroneous financials, she explained, so there may be an incentive to create self-serving records, to overdo the restatement or to avoid signing off at all. She suggested that companies consider hiring independent forensic accountants "as a sanity check."

Finally, Smilan urged companies to disclose information sensibly but defensively to inform the market, the exchanges and the SEC about the nature and scope of the problem. She reminded registrants that premature disclosure may be misleading or incorrect. Do not spin the bad news, lay blame too quickly or blame the SEC, she advised.